Monday, May 21, 2012

“Europe’s Quandary – Socialism or Free Markets?”

Sydney M. Williams

Thought of the Day

“Europe’s Quandary – Socialism or Free Markets?”

May 21, 2012

The G8 meeting at Camp David this past weekend was to strategize about Europe and how best to stimulate growth. The President met a day earlier with François Hollande, a Socialist and opponent, like Mr. Obama, of “austerity”. All parties are interested in promoting economic growth. Even the recalcitrant Germans who appear to emphasize austerity over government stimulus recognize the need for growth. In fact, it is the only way out of the mess in which Europe finds itself. It is the means, not the end that separates the two groups. Socialists like Mr. Hollande and statists like our President opt for the government leading the way. Free marketers argue that the only way to achieve long-lasting economic growth is to let the private sector take the reins.

The goal of any political leader should be to do what is best for the greatest numbers of their people. The bottom line is how best to improve the average person’s standard of living, while helping those without means or ability, and providing opportunity for the aspirational. Its foundations are a sound education and the assumption of personal responsibility. Policies should be aimed at reducing dependency, and should embed a respect for all people and a belief in their ability and good sense. Unfortunately, as the Obama campaign video “The Life of Julia” makes clear, personal independency is not the Administration’s goal.

M. Hollande presides over a country that generates about 61% of its GDP from government. And his policies would increase that percentage. Government spending for the 27 Euro nations generates just over half of GDP spending. In the U.S., when we include state and local governments, public spending is about 40% of GDP. In all cases, as government spending has increased as a percent of GDP, two things have happened: The absolute rate of growth has declined and the level of public debt has increased. For much of the post-war period in Europe (and in the U.S.), two trends helped: First, demographics favored the welfare state; there was, in the early post-war days, a surfeit of labor and a deficiency of retirees. The second trend has been a thirty year period of declining interest rates, giving cover to the long term costs of increased debt. Rates may decline further, though even my grandchildren realize there is not much juice left in that glass. Recent declines in rates have been artificially induced by the Federal Reserve.

Sunday’s article in the New York Times on the G8 was misleading in the sense that they characterized the choices as being between the “austerity” favored by Angela Merkel of Germany, versus the “growth” favored by François Hollande and President Obama. That simply is not the choice. There is no one who does not want growth. Only an idiot would claim otherwise. It is the wellspring of economic growth that is at dispute – should it be state fostered, or should economies rely more on free markets? Austerity, in some measure, is inevitable. If Hollande and Obama prevail, government spending will increase, but so will taxes. If Merkel is successful, taxes will be lowered and government spending will be reduced. Politicians promise that extrication will be painless, but in that they are wrong. They should be exploring the least painful way toward the most rapid growth possible.

There also needs to be a frank and open discussion as to what caused the mess in Europe, as well as talk as to why our recovery has been so anemic. Unemployment in the U.S. has gone down, but that is in large part because so many people have left the labor force. The participation rate of the U.S. workforce, the more accurate depiction of the labor situation, is at 63.6%, the lowest rate since 1981, a subject that Mr. Obama avoids. In contradiction to the President’s policies, red states have had a job growth rate almost twice that of blue states – Since recovery began, Texas, with 474,000 new jobs leads the way. California, with a loss of 285,000 jobs is the nation’s biggest loser. There is an irony in that the “high road” (growth) is being taken by M. Hollande, whose Socialist policies are the root cause of Europe’s economic woes, and Mr. Obama, who has presided over the feeblest recovery in the post-war years, while the “low road” (austerity) is being encouraged by Ms. Merkel who has presided over the most successful of the G8 economies.

Europe finds itself embedded in a deep and structurally unsound financial position. The U.S. is not far behind. While we are able to devalue our Dollar, which we have been doing, Euro zone countries doing poorly have no such opportunity. Extrication will be difficult. The most efficient and effective solution would be a combination of lessened regulation and tax reform that encourages investment – promoting free markets. But that is not the way of M. Hollande or President Obama. They both want the state to lead – states that have made pacts with their crony capitalist partners and that have made promises to the poor, handicapped and elderly that they will be unable to keep. They and their crony union leaders have made assurances to government employees that can never be fulfilled. They have sought a never-never land; instead, they find themselves aboard a houseboat on the River Styx.

The choice, contrary to what the Left would have us believe, is not between austerity and growth. No matter what happens, there will be some austerity – socialist policies have determined that. No, the choice is between statism and free markets. Press reports that do not make that clear are doing the public a disservice.